Essay: Subcontracting in Japanese Automobile Industry
The main success of Japanese automobile industry is the relationship between supplier and the company. Trust is the key point. Back to the old days, Japanese government thought there would be too many automobile companies in the market, and would like to cut the number in half. Therefore, each company was striving to save production costs and functional design. 70% of Japanese suppliers are family business, which gives them an incentive to save production costs as low as possible, and maximize profit so that it could benefit from the transaction (Smitka 1991, page 3).
In contrast to this system, American’s big three did not capitalize this opportunity as a new way to save costs, it decide to purchase instead of working with a few stable group of suppliers. Purchases make up 70% of Chrysler’s total cost (Smitka 1991, page 3). In addition, big three choose to use an elimination method to choose suppliers so that it can save, as much costs as possible in manufacturing costs. It brings in 10,000 suppliers and let them bid against each other to make sure last few suppliers are lowest cost (Smitka 1991, page 3). As a result, suppliers have no incentive to improve their skills, let alone to come up with a propriety design that can ensure auto firm can get competitive advantage in the market. Both parties are unwilling to maximize their efforts to obtain optimal output in this assurance game. Both of them suffered because of this and hence it end up spending more costs on purchasing. In contrast to American’s big three, Japanese auto firms emphasis on ongoing basis of cooperation. It have a stable group of 200-300 suppliers and encourage them by undertaking innovative ideas that can save costs while maximize profit (Smitka 1991, page 4). In addition, in the mean time, it is also undergoing statistical quality control and just-in-time production.